3 Stock Picks: UAUA, GERN, ELX

A plan to reconfigure major airline alliances is hitting some bumpy weather with regulators, whose scrutiny of Continental Airlines' (CAL) plan to join the Star Alliance and to cooperate with United Airlines (UAUA) on code-sharing arrangements knocked shares of United's parent down 7.6% in midday Tuesday trading Tuesday.

According to a report in The Wall Street Journal, the Department of Justice has raised concerns about the antitrust exemptions the carriers are seeking for domestic and international routes.

"Continental and United hope eventually to codeshare on nearly all of their domestic flight segments, combine customer lounges, consolidate their operations at common airports, provide frequent flier reciprocity, cooperate on ticketing, reservations and check-in and perform joint procurement," the DOJ wrote Friday. With codesharing, the airlines can sell tickets for each other's flights.

"The Department of Transportation is really the decider on this one, but they have to go through the DOJ so that agency can weigh in," says Helane Becker, an analyst with Jesup & Lamont. "What the Department of Justice is saying is 'We don't think this is a good plan and we think it's going to limit competition,'" she says.

For the airlines, such arrangements are about survival. Last week, Continental CEO Larry Kellner said "[It's] some of the most challenging conditions airlines have ever faced."

Becker says the antitrust exemption requests made could well have been a negotiating tactic with regulators, who'd be reluctant to prevent moves that allow any part of the nation's battered airline industry to survive. "It's entirely possible they decided to ask for everything and hope they get what they want, specifically the ability to discuss Transatlantic routes," she says.

Continental plans to leave the SkyTeam Alliance, which includes Aeromexico, Air France, Delta Air Lines (DAL), Northwest Airlines, among other airlines, on Oct. 24. Becker believes it could join the Star Alliance, which includes United and US Airways (LCC), by early November or December as long as the airlines can navigate the regulatory turbulence.

Bottom Line: Hold
Should the alliance go through, some of the cost savings could bolster United's finances at a time when every little bit helps.

Shares of biotech outfit Geron (GERN) rose 19% in midday trading after it announced a licensing deal with General Electric (GE) to develop human stem-cell-based drug discovery techniques and products.

The Menlo Park, Calif.-based company said the program will use stem cells derived from embryonic stem cell lines listed on the National Institutes of Health Human Pluripotent Stem Cell Registry. Financial terms will not be disclosed, the company said.

Mark Monane, an analyst at Needham & Co., said the news could boost the stock to $9 a share within 12 months, but said "we expect the terms [of the licensing deal] are modest." The company’s shares are currently trading around $7.80.

Geron also has some promising spinal-cord injury treatments that are beginning trials and the clinical results -- if positive -- could have an even bigger impact on the company's stock in the near-term, the analyst wrote Tuesday.

While some of the company's products are still in the early stage, the analyst says the company has enough cash on hand ($200 million at the end of the first quarter) to give it some operating security for the next several years.

Bottom Line: Buy
Investing in biotech is always risky, but a blue chip endorsement from the likes of GE improves the odds.

Broadcom's (BRCM) hostile takeover bid for storage company Emulex (ELX) heated up after the chip maker upped its tender offer price for the company to $11 a share from $9.25 a share.

The move comes after Emulex's proxy board advised shareholders to reject the earlier bid. The news boosted Emulex's shares by close to 9%, trading at around $9.90 a share in midday trading.

While the outcome didn't surprise analysts, the tactics raised the stakes more than the share price. "They've created a binary event, essentially," says ThinkEquity analyst Rajesh Ghai. "Now, two things can happen. Broadcom sits down with the board, and could eventually agree to a price that could be as much as $12 or $13 a share. Or, Emulex rebuffs Broadcom and the stock goes down to $8. Investors are hedging this as a 50% probability either way."

Thus far, Emulex is adopting a cautious stance. "The Emulex board will make its recommendation to stockholders on the revised tender offer in due course," the company said Monday on its web site. "The company urges stockholders at this time not to tender any shares into the revised offer pending the board’s recommendation."

BMO Capital Markets analyst Keith Bachman says Emulex's coyness could backfire. "Emulex's response continues to make it very clear that it has no interest in this transaction, and management and the board seem to share a common view," he wrote Tuesday. "However, at a higher price than $11, for example, in the midteens, we wonder if ELX’s board of directors and management would possibly have different views on the appropriate outcome – meaning the board might consider selling."

Bachman says he sees no other bidders for Emulex on the horizon.

ThinkEquity's Ghai says Broadcom needs what Emulex has to offer: developed products with a 36% market share that could immediately add to the larger company's bottom line. "From that product point of view, Broadcom is pretty desperate," Ghai says.

Bottom Line: Buy
One caveat: Only buy if you can stand the stomach-churning risk. All mergers have them, this seems to carry more than most, but the upside could really pay off.